U.K. Pound Advances Against Euro Amid ECB Rate-Cut Speculation

By David Goodman -
Dec 8, 2012

The pound advanced against the euro,
recording its biggest weekly gain since October, as speculation
the European Central Bank may cut interest rates next year
damped demand for alternatives to the common currency.

Gilts rose even after the Bank of England’s Monetary Policy
Committee maintained its program of asset-purchases to boost the
economy, known as quantitative-easing, at 375 billion pounds
($601 billion) and kept its key interest rate at a record-low
0.5 percent. Chancellor of the Exchequer George Osborne this
week revised down the government’s economic growth forecasts and
said the budget deficit will take longer to tame than originally
planned.

“The euro was doing very well until the early part of this
week and it’s now taken on board a greater probability of an ECB
cut,” said Simon Smith, chief economist at FxPro Group Ltd. in
London. “Sterling’s sensitivity to what the Chancellor said was
pretty low.”

The pound appreciated 0.5 percent to 80.72 pence per euro
at 5 p.m. London time yesterday, the most since the period ended
Oct. 26. Sterling was little changed at $1.6031.

ECB President Mario Draghi, speaking at a press conference
in Frankfurt after the ECB held its key rate at 0.75 percent,
said there had been “wide discussion” on borrowing costs at
the central bank’s meeting. A majority of policy makers were
open to cutting the benchmark rate, three officials with
knowledge of the Governing Council’s deliberations said
yesterday.

Osborne told lawmakers on Dec. 5 that his fiscal watchdog,
the Office for Budget Responsibility, believes he will miss his
target to begin cutting government debt in 2015-16. The economy
will shrink 0.1 percent this year instead of the 0.8 percent
growth predicted in March, and expand 1.2 percent next year
instead of 2 percent, Osborne said. Fitch Ratings said the
admission weakened the “credibility” of the U.K.’s fiscal
policy.

The benchmark 10-year gilt yield dropped three basis points
to 1.74 percent. The 1.75 percent bond due September 2022 rose
0.29, or 2.90 pounds per 1,000-pound face amount, to 100.07.

The yield difference between 10- and 30-year gilts widened
the most since February after the government announced pension-
plan revisions that may sap demand for longer-dated debt. The
spread widened 11.5 basis points to 136 basis points, the
biggest weekly increase since the period ending Feb. 10.

U.K. Unemployment

A Dec. 12 report will show the U.K. jobless rate held at
7.8 percent in the three months through October, according to
the median estimate of 27 economists in a Bloomberg News Survey.
The U.K. Debt Management Office is selling as much as 3.25
billion pounds of gilts due in 2022 on Dec. 11, followed by a
further 1.1 billion pounds of inflation-linked bonds maturing in
2024 two days later.

Gilts returned 3.1 percent this year through Dec. 6,
according to indexes compiled by Bloomberg and the European
Federation of Financial Analysts Societies. German bunds gained
4.3 percent and U.S. Treasuries rose 2.8 percent.